SGSs still look rich on a relative basis. Directionally, yields and SORA OISs have come off from elevated levels seen in December. However, through the bout of volatility in the commodities space, SGSs outperformed OISs from a receive perspective. 5Y BSS (OIS less yields) has widened towards 20bps, levels last seen in 2023 when the USD was firm. Over the past five years, the spread was wider only in late 2022 when the Fed started hiking aggressively. From an after-swap perspective, the richness of SGS is even more extreme. 5Y and 10Y USTs are yielding in excess of 20bps over SGS (after swap). It makes no economic sense to chase this trade further. It is more logical to long USTs, than to long SGSs (after swap) given current SGS yield levels and where basis swaps are trading. Instead, the environment appears more conducive to for institutions to borrow SGD and swap to their required currencies and achieve potential cost savings. This window where SGS yields stay overly low relative to OISs may not last. This month, there will be a 2Y reopen and 20Y mini auction (both auctions scheduled on 25 Feb). The increase in net SGS supply (no SGS maturities for some time) should drive some SGS underperformance.
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